Bear of the Day: Tennant Company (TNC)

Tennant Company (TNC), who currently holds a Zacks Rank #5 (Strong Sell) is a world leader in designing, manufacturing and marketing solutions that empower customers to achieve quality cleaning performance, significantly reduce their environmental impact and help create a cleaner, safer, healthier world. Its products include equipment for maintaining surfaces in industrial, commercial and outdoor environments; detergent-free and other sustainable cleaning technologies; and coatings for protecting, repairing and upgrading surfaces. Tennant's global field service network is the most extensive in the industry.

Recent Earnings Data

The company posted net sales of $262, million which was a record for a third quarter, and net income of $3.6 million. But gross margins fell to 39.9% from 42.6% in the year ago quarter. This decline was due to “continued pressure form field service productivity, manufacturing inefficiencies, and raw material inflation. Further, selling and administrative (S&A) expensed increased to $85.7 million, 32.7% of sales, from $60.6 million, 30.3% of sales from the year ago quarter. This increase in spending offset the companies cost reduction initiatives.

Decreased Guidance

During the earnings report, management decreased guidance for both FY 17 reported GAAP earnings, and adjusted earnings per share. Tennant now expects 2017 fully year reported GAAP earnings in the range of $0.05 to $0.25, down from the previously expected range of $0.85 to $1.05 per share. Further, adjusted earnings per share is now expected to be in a range of $1.50 to $1.70, well below the earlier expected range of $2.20 to $2.40. According to the report, “The change in guidance is attributed to continued operational challenges within our business, including field service productivity, manufacturing efficiencies, and raw material inflation, which accounted for approximately $0.37 per share.”

Management’s Take

According to Chris Killingstad, President and CEO, “Our third quarter results reflect slower growth in North America attributed to timing of key strategic account deals, the restructuring of our field service team, continued manufacturing inefficiencies and raw material inflation, matters we continue to address. While we faced some near-term setbacks, we are staying the course strategically and positioning Tennant to be operationally stronger than ever before. We are ahead of our acquisition plans for IPC, our core Tennant EMEA business grew by 14.6 percent in the quarter and a steady stream of new products has raised our vitality index to 47 percent. I remain confident that we are building the right platform for long-term profitable growth.”

Price and Earnings Consensus Graph

As you can see below, the decreased guidance, and gross margin issues have weighed heavily on the stock price and future earnings estimates.

Tennant Company Price and Consensus

Over the past 60 days, earnings estimates for Q4 17, Q1 18, FY 17, and FY 18 have all been negatively revised; Q4 17 fell from $0.77 to $0.35, Q1 18 plummeted from $0.43 to $0.04, FY 17 dropped from $2.25 to $1.56, and FY 18 was cut from $2.78 to $1.91.

Bottom Line

While management expects to rebound from these gross margin issues, the full recovery is not expected till the second half of 2018, rather than the beginning of 2018 as previously planned.

If you are inclined to invest in the Manufacturing/General Industrial segment, you would be better served by looking into Twin Disk Inc. (TWIN), Sun Hydraulics Corp (SNHY), and or Kadant Inc. (KAI), all of whom currently carry a Zacks Rank #1 (Strong Buy) rating.

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